Simple Relational Contracts to Motivate Capacity Investment: Price Only vs. Price and Quantity

Authors:
Terry A. Taylor;Erica L. Plambeck
Affiliations:
Graduate School of Business, Columbia University, New York, New York 10027 and Tuck School of Business, Dartmouth College, Hanover, New Hampshire 03755;Graduate School of Business, Stanford University, Stanford, California 94305
Venue:
Manufacturing & Service Operations Management
Year:
2007

Citing 14
Cited 7

Coordinating Investment, Production, and Subcontracting

Management Science
The Quantity Flexibility Contract and Supplier-Customer Incentives

Management Science
Selling to the Newsvendor: An Analysis of Price-Only Contracts

Manufacturing & Service Operations Management
Stochastic Inventory Systems in a Supply Chain with Asymmetric Information: Cycle Stocks, Safety Stocks, and Consignment Stock

Operations Research
Supply Chain Coordination Under Channel Rebates with Sales Effort Effects

Management Science
Contracting to Assure Supply: How to Share Demand Forecasts in a Supply Chain

Management Science
Capacity Investments in Supply Chains: Sharing the Gain Rather Than Sharing the Pain

Manufacturing & Service Operations Management
Measuring Imputed Cost in the Semiconductor Equipment Supply Chain

Management Science
Supply Chain Coordination with Revenue-Sharing Contracts: Strengths and Limitations

Management Science
Partnership in a Dynamic Production System with Unobservable Actions and Noncontractible Output

Management Science
Strategic Commitments for an Optimal Capacity Decision Under Asymmetric Forecast Information

Management Science
Supply Auctions and Relational Contracts for Procurement

Manufacturing & Service Operations Management
A Note on Probability Distributions with Increasing Generalized Failure Rates

Operations Research
Supply Chain Relationships and Contracts: The Impact of Repeated Interaction on Capacity Investment and Procurement

Management Science

A contract of purchase commitments on shared yields as a risk-sharing mechanism among fabless-foundry partnership

Proceedings of the 40th Conference on Winter Simulation
Information Sharing in a Long-Term Supply Chain Relationship: The Role of Customer Review Strategy

Operations Research
Contracting for Collaborative Services

Management Science
Dynamic Supplier Contracts Under Asymmetric Inventory Information

Operations Research
Procurement Mechanism Design in a Two-Echelon Inventory System with Price-Sensitive Demand

Manufacturing & Service Operations Management
Trust in Forecast Information Sharing

Management Science
The Relational Advantages of Intermediation

Management Science

Quantified Score

Hi-index	0.02

Visualization

Abstract

Because of long lead times associated with product development and building capacity, a supplier must initiate investment in capacity when the product development effort is ongoing. Because the product is ill defined at this point in time, the buyer is unable to commit to the future terms of trade through a court-enforceable contract. Instead, to provide incentives for capacity investment, the buyer informally promises future terms of trade. The prospect of future interaction creates an incentive for the buyer to pay the supplier as promised. We characterize optimal price-only and price-and-quantity promises and compare their performance. If the production cost is low and either the capacity cost is low or the discount factor is high, then the buyer should promise to purchase a specific quantity rather than simply promise to pay a per unit price; otherwise, the buyer should simply promise to pay a specified unit price.